Royal Bank of Scotland told by MPs to explain £25bn accounting 'distortion'

Two Members of Parliament have written to the Royal Bank of Scotland to demand
an explanation of the bank's accounting methods which they claim may be
distorting its capital position by as much as £25bn.

David Davis, the former Tory front bencher, and Steve Baker, the MP for Wycombe, have called for RBS to prove that its accounts are not being distorted by the controversial International Financial Reporting Standards (IFRS).

The letter, seen by The Daily Telegraph, details a disagreement between the MPs and RBS at a private meeting on May 24. The MPs argued that IFRS, which has been described as a "fatally flawed" system, is inflating the profits and capital position of RBS and other banks.

The MPs pointed to the fact that while RBS's accounts stated that the bank had £32bn in losses, the Government's Asset Protection scheme accounts show an expected loss of £57bn from its toxic assets alone.

Written by Gordon Kerr, a banking expert, the letter claims that the distortion in the accounts could be equivalent to as much as 50pc of RBS's core tier one capital. It says: "That means on a prudent basis RBS has a basic capital ratio (leverage on total assets) of 2.75pc rather than 5.5pc as stated."

The MPs claim that the rules are at fault but also that RBS has applied them more extensively than other European banks. Mr Baker is behind a Private Members Bill intended to make banks file accounts using the old UK GAAP standards, as well as IFRS, to force them to account for poor loans as well as failed ones.